“Small changes accumulate, and suddenly the world is a different place.” - Tim O’Reilly
We have witnessed so many ‘gradually, then suddenly’ movements in the technological space. World Wide Web, cloud computing, big data, AI and many other breakthrough technologies found very slow adoption rates in the beginning but now they are prevailing everywhere. Since the launch of Bitcoin, many advancements have happened in the blockchain field and decentralized finance or DeFi is one of them that found extra-ordinary adoption. The explosive growth of DeFi started in the summer of 2020. LP tokens and decentralized stablecoins were the first ‘money legos’ of DeFi and we got an alternative to traditional finance. The trustless nature and composability of the DeFi ecosystem gave it a strong platform to create subsets of emerging protocols rapidly. DeFi 2.0 movement is now trying to address the limitations of the first generation DeFi platforms by offering innovative liquidity provisioning and incentivization.
Introduction to Vader Protocol
Vader is a native stablecoin-anchored AMM (Automated Market Maker) with protocol owned liquidity (POL). ‘VADER’ means ‘Father’ in Dutch and the protocol was envisioned to solve the problem of decentralized liquidity. The developers of the protocol wanted to combine the best elements of different DeFi protocols into a single package. Finally, Vader Protocol took birth as a combination of Terra Money’s stablecoin minting, AMM of Thorchain (CLP+ILP) and the bond sales mechanism of Olympus Pro (POL). Vader is a community managed project and they desired to distribute tokens through a fair distribution method while establishing the value to the distribution.
Source - Vader Tokenomics
Stablecoins are the lifeline of DeFi but the price stability of collateralized stablecoins is a big issue. USDV is the stable asset of Vader Protocol. It is pegged to USD but price stability is achieved in a novel manner using the basic market forces of supply and demand. VADER acts as the collateral for minting stablecoin USDV.
Expansion – contraction: To maintain the price peg of USDV, VADER supply expands or contracts. The users of the protocol mint USDV by burning VADER and burning USDV to mint VADER. When TWAP (Time Weighted Average Price) of USDV for a time frame is above 1 USD, demand is very high for it. The protocol incentivizes the users to burn VADER and mint USDV to increase the supply of USDV so that USDV price gets stabilized. As VADER supply decreases due to this process, VADER price gets boosted. When TWAP of USDV is less than 1 USD for a time frame, demand is too low. Then the protocol incentivizes the users to burn USDV to mint VADER. The reduction in the supply of USDV helps it to maintain the price peg. As VADER supply increases in this process, VADER price gets lowered.
The market module: The market module of Vader Protocol enables atomic swaps between VADER and USDV. The price stability of USDV is maintained due to the arbitrage opportunity between VADER and USDV. The protocol’s algorithmic market maker module automatically expands and contracts the supply of VADER. It ensures that the users are always able to trade 1 USD worth VADER for 1 USDV and vice versa. The mint and burn function of the Vader Protocol market module should be accessed via the ‘Acquire assets’ feature from the DAPP in near future.
Continuous liquidity pools (CLPs) and slip-based fees
The AMM (Automated Market Maker) based DEXs like Uniswap provided a transparent, fair and permissionless trading experience and became instrumental for the growth of DeFi but the problem is that the liquidity providers may not earn big fees and they are exposed to impermanent loss. The impermanent loss is often so high that liquidity providing becomes a loss-making deal. Vader Protocol is trying to solve the issue by continuous liquidity pools (CLPs). The curated pools of Vader Protocol will have impermanent loss protection. It will encourage the users to provide liquidity for the long term without worrying (IL protection is paid over 100 days). The CLPs will also act as transparent on-chain price feeds for internal and external use. No outside oracle is involved here. The liquidity providers can deposit any token related to the appropriate pool (all pairs are anchored against USDV). They can provide liquidity asymmetrically also. Suppose, you want to provide ETH liquidity asymmetrically to ETH:USDV pool. You can deposit only ETH to the pool. If your act unbalances the pool, the arbitrageurs will come to take an arbitrage opportunity. The platform can be easily accessed by all arbitrage bots and they can balance the pools all time. The whole process ensures that the token prices on the platform match the actual market value.
All profits generated from the trading fees are returned to the LP providers here. The problem of the traditional AMM based model is that the fees do not capture the value of liquidity. Liquidity is extremely important in such protocols as it is the main resource. If liquidity is very less, you won’t be able to perform a big swap. In the case of Vader Protocol, fees are related to the demand for liquidity. In a thin pool, the LPs earn more fees due to the unavailability of liquidity depth and in a big pool, the LPs earn fewer fees due to the abundance of liquidity depth. The CLP algorithm includes a slip-based fee mechanism that is sensitive to liquidity. A sandwich attack (where the attacker front runs and back runs simultaneously) becomes very expensive on Vader Protocol due to the slip-based fees.
Protocol owned liquidity
Dozens of DeFi projects appear every day and each one mints dollar. The astonishing APY brings a lot of new users to the platform but ultimately maximum projects fail and the token value comes to near zero. The biggest issue of DeFi platforms is that the protocols do not own the liquidity. Vader Protocol consists of protocol owned liquidity (POL) and protocol owned treasury. The users can purchase discounted VADER by purchasing Vader bonds. Vader bonds are of two types – Fixed Price and Perpetual Bonds. The fixed price bonds are not available all the time. First Vader fixed price bonds got sold out in 30 minutes. The perpetual bonds are similar to Olympus bonds and are designed to run for a long time duration. These bonds are vested for a certain time duration and can be acquired by supplying various LPs. The bond sales are carried out as per the need of the protocol. As the protocol owns the LPs, it also earns trading fees. The treasury uses the profit from bond sales to mint VADER and distributes it to the stakers of VADER. Staked VADER is called xVADER and it automatically compounds with no risk of impermanent loss. This way, VADER also becomes backed by assets. As the protocol continues to own more liquidity, the platform becomes stronger and VADER becomes more valuable. The protocol does not want to ignore the price growth of VADER while increasing supply, so the staking APY is not abnormally high like many other protocol owned liquidity platforms.
Vader is a complex protocol. It follows the Olympus playbook by retaining the intrinsic value of the tokens inside the system (owning LPs) but the soon to be launched stablecoin-anchored AMM will give it wings to fly. The LPs of Vader AMM will become first-class citizens as all slip-based fees directly get distributed to LPs. The protocol also innovates with its aim to build a true, decentralized stablecoin. The best core ideas of DeFi have been packaged in a single platform through Vader. As the basic protocol has been designed to be governance minimal and does not seek rent-seeking governance fees, it should be found to be very trustworthy and transparent by the investors. So, what does the governance of the protocol decide? xVADER stakers get full governance rights over the treasury assets here and decide the future roadmap. Vader wants to build an ecosystem around the main protocol, so governance will play an important role in launching ecosystem projects. The possibilities and opportunities are enormous for Vader due to its technological brilliance and flexibility. Synthetic asset minting strategy using the LPs as collateral for synths is in their whitepaper already. Keep an eye on Vader to see how it scales up for long term sustainability.
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Note: The article was first published here.
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